UK gilt yields fell from their highest level in 14 years after the Bank of England said it would buy “any amount” of bonds needed to restore orderly market conditions.
The 10-year benchmark Gilt yield TMBMKGB-10Y, 4.053%, which moves inversely with prices, fell 49 basis points to 4.03% after temporarily falling below 4%.
Earlier Wednesday, the yield had risen to 4.6%, up more than 120 basis points in just four trading days, as investors sold government bonds in response to what they saw as a dangerously lavish budget from new Chancellor Kwasi Kwarteng.
Kwarteng’s proposal for debt-financed £45 billion in tax cuts at a time when inflation was at a nearly 40-year high of 9.9% has been criticized by the International Monetary Fund.
After further selling on Wednesday that took the 30-year gilt yield TMBMKGB-30Y down 3.943% above 5% for the first time in decades, the Bank of England stepped in to calm markets. The 30-year yield slipped 108 basis points to 3.91%, below levels before Kwarteng announced the tax cuts.
“The bank is closely monitoring developments in financial markets given the significant repricing of UK and global financial assets,” the BoE said in a statement.
“This re-rating has gained prominence over the past few days – and particularly affects long-dated UK sovereign debt…. In line with its objective of financial stability, the Bank of England stands ready to restore the functioning of the market and reduce any risk of contagion in credit conditions for UK households and businesses,” she added.
See also: Here are the bonds the Bank of England will buy
Reports emerged on Wednesday that the recent sharp declines in gilts and the pound have left some UK pension funds with margin calls of up to £100m ($107m) each. In addition, some UK banks suspended mortgage offers after struggling to set home loan prices due to volatility in the bond market.
The BoE said it will buy long-dated UK government bonds to restore order and “purchases will be carried out to whatever extent is necessary to achieve that outcome”. It suspended its planned gilt sales as part of its quantitative tightening program.
“The decision to intervene in the gilt market shows that the BoE has no intention of raising interest rates to the 6% level currently marketed in,” said Samuel Tombs, UK chief economist at Pantheon Macroeconomics.
“Short interest rates at this level would mean that many households and businesses would simply be unable to sustain their monthly loan repayments and pension funds would be unable to meet their obligations, threatening financial stability,” he added.
The TMBMKGB-02Y 2-year government bond yield fell 34 basis points to 4.27% from 4.273%, despite the central bank not buying short-dated securities.
The Treasury said it had “fully compensated” for the BoE’s move, stressing that while the Chancellor of the Exchequer is “committed to the independence of the Bank of England… the government will continue to work closely with the bank to meet its goals of financial stability and inflation.” to support. ”
“Remarkable, necessary and deeply worrying”
Krishna Guha, strategist at Evercore ISI, said the BoE’s decision to postpone QT ahead of schedule and launch a new QE program was “remarkable, necessary and deeply concerning”.
“Remarkable because it reveals the seriousness of the risks to financial stability posed by the uncontrolled reaction of bond markets to reckless UK budget plans. Necessary because it is the central bank’s responsibility to ensure the functioning of the market in the core government bond market and is proving effective in early trading,” he said.
“Deeply concerning because it leaves previous QT plans in disarray, has an uncertain outcome and raises further concerns about the central bank’s independence in exercising its monetary policy responsibilities,” Guha added.
The Pound GBPUSD, +0.27% initially rallied but traded lower at $1.0683. the MPC will be reluctant to let it slide,” said Pantheon’s Tombs.
The FTSE 100 UKX, +0.25%, rallied on the news but remained down 0.6% on the day. Insurers including Aviva AV, -5.09% and Legal & General LGEN, -5.66% posted heavy losses.
US stocks opened higher, with the S&P 500 SPX up +0.91%, up 0.3% in early trade.
— Steve Goldstein contributed to this report